A business loan can create new opportunities for your business. However, getting a business loan isn’t easy. You need to consider a lot of factors before applying for the loan. You must find out the monthly payments, interests, and other costs to know whether you can afford to take up the loan. If you can’t repay it, then you might go bankrupt. Therefore, your journey to getting a loan must start with a business loan calculator.
Reasons For Using a Business Loan Calculator
Smart borrowers will always use a business loan calculator for accurate financial forecasting. It will let them know in advance how much they will need to pay. By evaluating your business cash flow, you can decide whether taking a business loan is a viable option for you at the moment. You can also find out the true cost of taking the loan. There are several business loans available today. Using a business loan calculator, you can compare the different loan options and know which loan is offering a lower interest rate, a larger principal amount, and better loan terms. Once you have all the accurate data available, you can negotiate loan terms with the lenders confidently.
Crucial Factors To Calculate
Before applying for a business loan, you must calculate a number of things. These will tell you whether you should apply for the loan or not. These factors will also tell you the probability you have of getting your loan approved.
1. Debt Service Coverage Ratio (DSCR)
This metric determines whether your business can use operating income to repay the loan. If you divide your net operating income by total debt, that is, principal plus interest, then you will get the debt service coverage ratio. If you get a ratio of 1.25 or more, it shows that your business has a 25% cushion over debt obligations, so you won’t get into trouble if you take up the loan. However, a ratio less than 1 means you don’t have sufficient operating income to repay your debt. Therefore, it is advisable not to apply for the loan as it will make you dive into financial trouble.
2. Debt-To-Income (DTI) Ratio
The amount of debt a business uses to provide funds for its operations and growth relative to the business’s equity refers to how leveraged the business is. If your business has high leverage, then it means that the debt is high compared to the owner’s investment. This will overstate the returns, thus increasing financial risk at times of downturns. Lenders usually prefer a DTI ratio of less than 40% to 43%. Having a lower ratio means the business has the capacity to manage more debts. Therefore, applying for a new loan won’t exert extra financial pressure on the business.
3. Current Ratio (Liquidity)
The current ratio tells whether a business can repay its short-term liabilities using its short-term assets like inventory, cash, or receivables. If your business has a current ratio of 1.5 to 2.0, then you can apply for a new loan. A ratio below 1.0 indicates that the business will struggle financially if an extra loan is taken.
4. Personal And Business Credit Scores
Before applying for a business loan, you must know whether you and the business have sufficient credit scores to be eligible for the loan. A credit score of 700 or more is considered to be a good score. You may get loans with a credit score of below 650, but you will need to pay a high interest rate. You should see your credit report for any errors that might affect your credit score. To increase the chances of securing a loan, you should keep your credit card utilization less than 30%. Therefore, try to pay down the credit card balances often.
5. Cash Flow And Working Capital
These figures will show whether your working capital is enough to comfortably run your daily business operations. Net cash flow is the total inflows minus total outflows. You must ensure that your business shows a positive cash flow trend.
A business calculator will empower you to make informed decisions about getting a business loan. You will get a clear picture of your financial situation and know whether it’s a good idea to get into another financial commitment. You can also do better financial planning if things are transparent.
